INR: Risk of USD/INR Downside Evident via Options, RBI Continue to Intervene
Oct-16 08:28
Reports yesterday from Bloomberg and Reuters pointed to heavy FX intervention by the RBI in both the onshore and offshore market, with further intervention seen as highly likely given that the central bank sees the recent build up in short rupee positions as speculative. Reuters report, citing traders, that the RBI sold an estimated $3-5bln – its heaviest round of intervention in months – with significant activity noted to have taken place in the NDF market.
- Bloomberg report that the central bank continued with its intervention on Thursday, albeit at a relatively smaller scale compared to yesterday. USD/INR has fallen a further 0.2% today, placing the pair at its lowest level since September and below the 50-day EMA – an average spot has not closed below since July. The 100-DMA, at 87.0609, marks next notable support.
- Given the likelihood of further intervention, net downside demand for USD/INR is still evident via options, tipping the vol skew firmly in favour of puts – 1-month USD/INR risk reversals are currently at their most negative since 2007 (see chart below).
- Indeed, MUFG think that short INR positions will probably be reduced in the near-term given RBI’s strong signal. Over the medium-term, they still think that some modest FX weakness is not a bad thing for India given the global uncertainties and to maintain some export competitiveness. MUFG therefore say they will be biased to look for opportunities to go long USD/INR later depending on where FX settles.
- Yesterday, SocGen recommended initiating a short position in 1-month USD/INR at 88.28, targeting 86.00 with a stop at 89.40. They believe that USD/INR has already priced in most of the key INR-negative factors, and that the RBI’s pledge to stabilise the currency presents a compelling case for a tactically short USD/INR trade.
Figure 1: 1-month USD/INR 25d risk reversal
Source: Bloomberg Finance L.P.
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